Greece's private creditors pleaded on Tuesday with European officials who rejected their bond swap offer to hammer together a deal before Athens tumbles into a chaotic default.
Athens' hopes for a swift deal with lenders were evaporating after euro zone ministers on Monday rejected creditors' demand for a 4% coupon, or interest rate, on new, longer-dated bonds in exchange for existing debt.
The country is desperate for a deal to ensure funds from a 130 bln euro rescue plan drawn up by European partners and the IMF arrive before 14.5 bln euros of bond redemptions fall due in March.
"It's important that all parties recognise how much we have at stake and work together and cooperate to find a solution," said Charles Dallara, who negotiates in the name of private bondholders through the International Institute of Finance.
He declined to comment on whether his group would back down on the demand for a 4% coupon billed as their "final offer" and said their position was already clear. Greece says it is not prepared to pay a coupon of more than 3.5% which would impose steeper losses on its private creditors.
Senior euro zone officials suggested they were preparing for another drawn-out battle despite the ticking clock. They want to make sure any debt swap deal does enough to bring Greece's mountainous debts back on track, to avoid the prospect of having to once again stump up funds for Athens.
German Finance Minister Wolfgang Schaeuble dismissed talk of the IIF's "final offer" with: "That happens in every bazaar."
"You do not need to be impressed by that," he said. "At least I do not."
Without a deal, Athens will be forced into a non-voluntary, hard default that could push other weak euro zone members closer to the edge, although experts are beginning to wonder whether the threat of contagion is as severe as it once was after the European Central Bank flooded the banking sector with nearly half a trillion euros of three-year money in December.
Standard & Poor's will likely downgrade Greece's ratings to "selective default" whether or not a debt restructuring is achieved with the voluntary buy-in of private creditors, but the ratings agency said the ripples might not spread.
"It's not a given that Greece's default would have a domino effect in the euro zone," John Chambers, chairman of S&P's sovereign rating committee, said.
The IMF is more concerned, however.
It cut its outlook for global growth sharply on Tuesday, said the euro zone debt crisis was escalating and dragging down the world economy and called for policies to restore confidence.
Conservative leader Antonis Samaras, head of one of three parties backing Greece's technocrat prime minister, told Reuters he expected the talks to be wrapped up by March 5 at the latest and said the country must head to polls as soon as the EU/IMF bailout was finalised.
He set April 8 as the deadline for elections.
A source close to the talks said creditors would go towards an involuntary debt swap if there was no agreement by the end of the week, once again raising the chances of a messy default.
Dallara said he was confident of large-scale participation by bondholders in the swap if the two sides were able to strike a voluntary agreement. He is expected to return to Paris to co-chair an internal meeting of creditors on Wednesday to discuss latest developments in the talks, the IIF said.
The bond swap is meant to cut 100 bln euros from Greece's debt burden of over 350 bln, in a bid to ultimately slash its debt from around 160% of GDP to a more manageable 120% of GDP by 2020.
Under the agreement drawn up in October to rescue Greece for a second time, bondholders would take a 50% writedown on the notional value of their Greek holdings.
Sources close to the protracted Athens talks said last week the two sides were converging on an agreement that would see private creditors accepting a real loss of 65 to 70% and new bonds with 30-year maturity.
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